David Berry: Layton proposes wrong solution to right problem

The New Democrats are not traditionally thought of as the soundest fiscal managers, but you do have to give credit where it is due: By using his first campaign plank to address household debt, Jack Layton is at least proving that he knows what the major issues facing Canada’s economy are. It’s a shame that his proposal to cap credit card rates also proves that he doesn’t necessarily know what to do about them.

Though it has been largely subsumed by talk of scandals and coalitions and other forms of easy chest-puffery, the rise in personal debt — topping an average of $100,000 per household earlier this year — is the snake below the surface of Canada’s relatively calm financial waters. The lowering of interest rates to combat the recession has worked almost too well, keeping Canadians not just spending but spending beyond their means, to the point where Canada now ranks first among developed countries on an index of discretionary income versus accumulated debt.

Just from that statistic, it’s safe to assume that Canadians are not the most financially literate bunch. At these debt loads, even a modest increase in lending rates could start pushing significant numbers of families to or over the financial brink. In a worst case scenario, that could extend the recession or plunge us back into one after a modest recovery. And that’s not one of the more unlikely outcomes — it’s a given that, eventually, interest rates will go up again.

Unfortunately for the Dippers, though, capping credit card rates isn’t likely to help in a very meaningful way. It looks more like a populist bit of bank-bashing than a significant reform

For starters, Canada has already tightened up its regulations and eliminated the most predatory and underhanded credit card practices, having instituted a grace period on purchases, made it mandatory to inform consumers when their rates or limits are going up and ensured that bill payments go towards whatever is most beneficial for the consumer. There is now also a code of conduct to aid merchants with managing credit purchases, to ensure that credit card companies aren’t profiting from misinformation among that caste, either (although Mr. Layton rightly wants to make compliance mandatory as opposed to voluntary).

In fact, a cap on rates is probably a step too far, as the inevitable dip in profits would likely mean far fewer Canadians would qualify for cards. And while too much debt is an undoubtedly bad thing, reasonable access to credit is one of those things that keeps an economy running smoothly. That’s particularly true if, as Mr. Layton claims, many Canadians have started using credit cards to make ends meet month-to-month, although that’s a highly dubious claim at any rate. (A short takedown: There’s a decent amount of evidence that suggests credit card debt is actually more closely related to poor spending choices than staples, and if a significant number of Canadians can’t pay afford basic needs every month, we have larger problems than the interest rates on their Visas).

More importantly, though, the credit card issue is largely beside the point: The major driver of increased household debt in Canada is mortgage rates and lines of credit on homes, which accounts for roughly 70% of the increase in debt over the last few years. Driven by runaway real estate prices in cities and credit that is too easy to get, mortgage debt is also a far more serious threat: It was default on home mortgages in the U.S. that kicked off the last recession mess, after all, and the effects would only be compounded by being over-represented in our largest cities

There is a pretty simple reason why Layton didn’t talk about that, though: the Conservatives have already instituted changes. Most notably, this past January they reduced the maximum amortization period to 30 years from 35 (down from 40 in 2008) and removed government backing of home-based lines of credit. Still, though, there’s arguably more that could be done, particularly in the form of making it harder for Canadians to refinance their house to cover other expenditures.

Mr. Layton took aim at the right target out of the gate; let’s hope for the NDP’s sake he readjusts his sight for the next one.

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